Are you ready for auto enrolment?

There is no getting away from it: people are living longer and not saving enough to give them the income in retirement that they would like. As life expectancy continues to increase, membership rates of employer-sponsored private schemes have continued to decrease.  The Department of Work and Pensions (DWP) estimates that about seven million people in the UK are not currently saving enough for their retirement.

 

In light of these concerns, the Pensions Commission has recommended automatic enrolment ("auto-enrolment") as an effective means of achieving higher workplace pension scheme take up: the Commission`s view is that, short of requiring people to save, the best means of encouraging saving is to automatically enrol individuals into a pension scheme. 

 

Sounds great in theory, but the responsibility for carrying out the auto enrolment process will fall firmly on employers.  For many employers, the process of providing a workplace pension will, in itself, be entirely new.  Those with existing schemes will have to ensure that their schemes comply with quality requirements, that they match the minimum contribution requirements, and that all their "eligible jobholders" are auto enrolled.
 
Staging Date:

 

Auto enrolment will have a major impact on employers and preparation will be key.  The recommended reforms will be phased in from October 2012, with some employers already receiving notice of their "staging date" (the date on which they will be expected to implement auto enrolment at their workplace).  The largest employers will be staged first, through to the smallest.  However, employers should note that some of the reforms, such as safeguards for individuals, will be applicable for all employers from 2012.

 

Some employers may want to align their staging date with other key dates in their financial or operational calendar; for example, have their staging date fall on the first day of their financial calendar.  To accommodate this, employers are entitled to choose a different staging date, provided it is earlier than their originally allocated date.

 

 

Auto enrolment will apply to all employers.  An "employer" is defined as anyone who has a contract with a worker.   Literally all employers will eventually be covered by these provisions, which may come as a (costly and burdensome) surprise to some: for example, even a private household that employs a nanny will, eventually, be required to provide appropriate pension provision if the nanny qualifies as an "eligible jobholder".

 

 

Auto enrolment applies to all "eligible jobholders" from their first day of work (although Parliament is currently considering proposals to allow employers a three-month waiting period before having to auto-enrol new joiners).  Eligible jobholders are those aged between 22 and state pension age; are working, or ordinarily working, in the UK; and have qualifying earnings payable by the employer in the relevant pay reference period that are above the earnings trigger for auto enrolment (currently £7,475).

Individuals that are auto enrolled into a pension scheme will have the right to opt out.  However, the employer must automatically re-enrol them within three years.

 

 

Employers with defined contributions schemes will be required to contribute a minimum of 3% of "qualifying earnings" to "eligible jobholders" who remain in the pension scheme and do not opt out.  For employers who are new to pension provision, this will represent a significant cost.  On the other hand, many employers are already contributing in excess of the minimum requirements.  These employers will, however, have to consider whether their current scheme meets the minimum quality standards and may experience a sharp increase in the level of participation in their scheme.  There will be different arrangements for employers using defined benefit or hybrid schemes, providing their schemes meet certain criteria.

 

The administrative costs of auto enrolment may be more difficult to swallow.  Firstly, employers without an existing scheme will have to cover the cost of setting one up.  All employers will have to put in place systems to identify and automatically enrol newly eligible jobholders, either because they have reached age 22 or because they have reached the qualifying earnings threshold.  Similar systems will have to be put in place to administer opt outs (a quarter of workers are expected to opt out once auto enrolled) and also to process workers who opt into the scheme but are not eligible jobholders. 

 

Worker turnover will be a key factor in the ultimate cost of auto enrolment to employers, as this will determine the numbers of auto enrolment processes and scheme leavers that the employer will have to process.  Smaller firms tend to have a higher turnover of staff.  Smaller firms are also less likely to already provide access to pension schemes or to provide contributions, if they do.  This ultimately means that smaller companies will be disproportionately affected by the costs of auto enrolment.

 

 

In the short term, it is expected that employers will seek to pass on the additional costs of auto enrolment to workers through lower pay deals.  Some may seek to pass costs on to consumers through higher prices, assuming they are competing in a domestic market only.  Others may be able to absorb the costs in their profit function and a lucky few may manage costs through increased sales.  Any employer seeking to change terms and conditions of employment must do so lawfully and in accordance with any collective consultation obligations, to avoid claims of constructive unfair dismissal and protective awards.

 

Some employers will, no doubt, seek to level down existing pension provision to accommodate the costs of extending that provision under auto enrolment.  In so doing, the employer may need to lawfully change terms and conditions of employment, if its employees are contractually entitled to certain pension rights.  Making certain prescribed changes to existing pension schemes will also require the employer to collectively consult under the relevant pensions regulations.

 

 

Subject to meeting minimum quality standards, employers will be able to choose the pension scheme into which they auto enrol their workers.  They may continue to use an existing pension scheme or amend an existing pension scheme to meet the qualifying criteria.  Alternatively, they may choose to set up a new qualifying pension scheme.  Another option is to use the National Employment Savings Trust ("NEST") for some or all of their eligible jobholders.  NEST is a trust-based occupational pension scheme, established to fill the gap in the current pensions market that excludes many small employers from pension provision.  The scheme is designed to be low cost, and will accept any employer that wishes to use it, subject to an annual contribution limit of £3,600 (in 2005 terms) per member.

 

 

The DWP has found that employers are particularly concerned about the burdens of choosing a designated pension scheme for the purpose of auto enrolment, and being seen to provide advice to employees and the risk of litigation if they give the wrong advice or select a scheme that performs badly.

 

Employers must avoid anything that can be seen as coercion or incentivising eligible jobholders to opt out of the designated pension scheme after being auto enrolled.  For example, even something as innocuous as offering a more generous pension scheme to those who opt out of the auto enrolment scheme could fall foul of the legislation.  Employers will also have to ensure that their recruitment processes cannot be perceived as incentivising new joiners to opt out.

 

Look out on employmentbuddy for details of forthcoming Clarkslegal seminars, giving practical advice on how to prepare your organisation for the impending pension reforms and ensure a smooth transition to auto enrolment.  To receive an invitation once dates for the seminar are confirmed, please forward your contact details to marketing@clarkslegal.com.